Interest Rolling Up - Advice Needed

MichelleUK

Would your MIL be prepared to leave you a legacy? E.g. I leave my son-in-law the amount of £1,500 for each year that I survive beyond 2016.

This would not be as watertight as a contract, as she could potentially change the will, but it may be a possible solution for you. Also, you would not have to declare it as interest, as it would not be interest, it would be a tax free inheritance.

Also, the new Personal Savings Allowance only applies to interest from very specific sources - it looks like the interest from the loan would not qualify and you would have to pay tax on all of it.

super_reds

MichelleUK wrote: »

Would your MIL be prepared to leave you a legacy? E.g. I leave my son-in-law the amount of £1,500 for each year that I survive beyond 2016.

This would not be as watertight as a contract, as she could potentially change the will, but it may be a possible solution for you. Also, you would not have to declare it as interest, as it would not be interest, it would be a tax free inheritance.

Also, the new Personal Savings Allowance only applies to interest from very specific sources - it looks like the interest from the loan would not qualify and you would have to pay tax on all of it.

Thanks, might be worth considering but as you say not watertight.

xylophone

Can you make the charge larger than her immediate needs IYSWIM?

Would your MIL be prepared to leave you a legacy? E.g. I leave my son-in-law the amount of £1,500 for each year that I survive beyond 2016.

HMRC could take the view that any such arrangements were disguised interest.


https://www.taxation.co.uk/Articles/2013/09/18/313671/inflation-proof-loan

Savvy_Sue

super_reds wrote: »

Whilst we don't need the interest I think it equitable to do so as my wife wouldn't be the only person to benefit from the estate. If don't charge interest then either my wife or her sibling would probably inherit more than a fair share of the house if that makes sense.

super_reds wrote: »

She wouldn't be the sole inheritor and hence the problem to make it fair for all parties I think interest should be charged.

Ok, that makes sense. Is the other (potential) beneficiary the kind of person you can discuss this with? Noting xylophone's comment, but one possibility might be a Deed of Variation after death - which is no use if she sells and moves on before death ...

super_reds

Savvy_Sue wrote: »

Ok, that makes sense. Is the other (potential) beneficiary the kind of person you can discuss this with? Noting xylophone's comment, but one possibility might be a Deed of Variation after death - which is no use if she sells and moves on before death ...

Thanks again for your reply

We've certainly discussed this with the other potential benefactor as wanted to make sure if they wanted to lend some money as part of the package they could and not be somehow disadvantaged. Unfortunately they don't have any spare cash so probably won't be able to help.

Again I think anything like this isn't going to be watertight as who knows what might happen in the future and who the final benefactors may be. I always think some people are very funny about money and strange things may happen if they stand to gain or lose a sizeable amount.

polymaff

super_reds wrote: »

.... Again I think anything like this isn't going to be watertight as who knows what might happen in the future and who the final benefactors may be. I always think some people are very funny about money and strange things may happen if they stand to gain or lose a sizeable amount.

For that very reason, if possible/acceptable, why not just pay a stipend and forget the subsequent settlement. Just out of charity. It sounds as though your family relationships are quite positive now. Get involved in contractual liabilities and that relationship will surely sour. [voice of experience speaking]

super_reds

polymaff wrote: »

For that very reason, if possible/acceptable, why not just pay a stipend and forget the subsequent settlement. Just out of charity. It sounds as though your family relationships are quite positive now. Get involved in contractual liabilities and that relationship will surely sour. [voice of experience speaking]

Sorry I don't really understand. She needs cash up front to buy a property to live in. She was going to Equity Release but IMO the rates are very expensive so would try and help her out at a cheaper interest rate.

polymaff

super_reds wrote: »

My wife and I are thinking of helping out my MIL by effectively doing an equity release for her so she can stay in a nicer property.

super_reds wrote: »

Sorry I don't really understand. She needs cash up front to buy a property to live in. She was going to Equity Release but IMO the rates are very expensive so would try and help her out at a cheaper interest rate.

Sorry if I've misunderstood. I took your original "stay" to mean that the MIL wanted to stay where she was, but didn't have enough income to continue to do so and that you were trying to help her out now in exchange for a charge on her estate.

booksurr

super_reds wrote: »

Sorry I don't really understand. She needs cash up front to buy a property to live in. She was going to Equity Release but IMO the rates are very expensive so would try and help her out at a cheaper interest rate.

why does she need the cash up front? why can't she wait until she sells her current place like most people do?

what you propose to do is a private mortgage which she would use as bridging finance, ie bridges the time between buying her new place and repaying the loan using the proceeds from the sale of the old place. Again why the rush?

However you try to dress it up if she repays you 1p more than she borrowed then you will be liable to income tax on that interest. It is not an interest only loan, as that implies the interest is paid during the course of the loan but not the capital, it is a with interest loan repayable on maturity, since you want to get back more than you loaned her.

whilst allowing for death is of course an event to be considered, why do you expect that to be a risk when she is selling her property anyway? Just give her the loan, charge interest and pay a bit of income tax on the small amount of interest you will earn before she sells.

Keep_pedalling

So more like a lone to buy a more expensive house, and nothing like equity release.